Any direct mention of deleveraging was notably absent from the economic plan, fueling speculation that policymakers may be dialing back from their push to move aggressively on reducing China’s debt.

President Xi’s eponymous economic philosophy was introduced as the new guiding theory for the Chinese economy.

On December 20th, the Chinese leadership concluded its most important annual economic meeting, the Central Economic Work Conference (CEWC), which historically sets the broad policy priorities for the year ahead. Businesses and investors are always well-advised to parse through the gathering’s key outcomes since they often provide signposts about the future direction of the Chinese economy. However, this year’s three-day conclave carried even greater significance than usual as the first major policymaking session following President Xi’s dramatic consolidation of power at the 19th Party Congress in October – with important implications not only for the year ahead but also the duration of his second five-year term and perhaps beyond.

Embracing “Xiconomics” for China’s new era – three years, three battle fronts

While previous conferences drafted one-year plans, the Xi administration departed from standard practice and unveiled the first economic blueprint of its second term as a longer term approach to planning. The three-for-three roadmap demarcated the “three tough battles” where Beijing needs to dedicate its attention and resources to winning over the next three years, namely preventing and defusing major risks, particularly financial vulnerabilities, alleviating poverty, and controlling environmental degradation.[1] It also introduced “Xi Jinping Thought on Socialist Economy with Chinese Characteristics for a New Era” as the new guiding philosophy for China’s economy, described by state-run Xinhua News Agency as the “theoretical crystallization” of the past five years of economic development.[2]

Navigating the shift from “high-speed” to “high-quality” growth

At their heart, China’s new blueprint and the president’s eponymous economic philosophy revolve around maintaining stability while successfully achieving the transition from the old era of “high-speed” growth to the new one of “high-quality” growth. The primary policy vehicle for driving through this rebalancing will remain supply-side structural reform, which was first unveiled two years ago to address the built-up excesses in the Chinese economy, such as surplus productive capacity and high debt levels.

In 2018, Beijing will likely continue to show a higher tolerance for lower growth, particularly after the Chinese economy’s surprisingly robust economic performance this year exceeded most expectations. However, the maximum-growth model that has been followed for decades will not be retired overnight. The Xi administration emphasized that its efforts to rein in major risks will be accompanied by a commitment to ensuring that economic growth is kept within “a reasonable range.” All downplaying of growth targets aside, growth will retain its place on the headline agenda. The target for 2018 will not be formally announced until the National People’s Congress (NPC) in March, but companies can expect it to either be the same as this year’s target of “around 6.5%” or slightly lower.

O deleveraging, where art thou?

The omission of any direct reference to deleveraging in the three-year economic plan dominated much of the foreign media’s coverage of the CEWC. After the 2016 meeting billed tackling China’s corporate debt as a “top priority,” the Chinese leadership has been increasingly vocal about the urgency of reining in the country’s accumulating debt pile. Deleveraging’s conspicuous absence from the 2018-2020 roadmap stirred speculation that policymakers are now dialing back from their commitment to control credit expansion due to concerns about jeopardizing growth if they move too aggressively. This was further fueled by the plan’s emphasis on having “reasonable” credit expansion next year rather than stronger language calling for a curbing of lending.

However, while Beijing may indeed be poised to adopt a more moderate approach to clamping down on excessive leverage, it is unlikely to dramatically scale back from what has emerged as one of the clear cornerstones of the Xi administration’s economic agenda. Next year might not see an intensification of efforts to soften the pace of leveraging through new measures, but the various policies rolled out over the past year to curb rising debt levels can be expected to continue taking shape and having a greater impact in 2018.[3]

Further takeaways for companies

In terms of China’s business environment, the CEWC’s plan reiterated oft-heard pledges to widen market access for foreign companies, but no details were provided on which sectors would be liberalized or a specific timetable. Executives can expect reform to continue progressing at a very gradual pace and confined within the spaces that Beijing deems beneficial to China’s national development in the new era.

The plan also vowed to continue shifting the Chinese economy away from “Made in China” towards “Created in China.” As spelled out in the political report at the 19th Party Congress, the Xi administration is dedicated to building China into a “country of innovators” and moving away from low-cost manufacturing and cheap exports. This process is already well-underway, with China now leading in the digital space and making rapid advances in everything from artificial intelligence to electric vehicles. In the coming years, the “Made in China” stamp may well start to become synonymous with high-quality, innovative products as “Created in China” evolves from an aspiration to a reality.

And the inclusion of poverty alleviation and pollution control as two of the economic plan’s top three priorities further emphasized the Chinese leadership’s commitment to embedding a more people-oriented approach at the core of its economic management strategy. Intensified efforts from authorities to stamp out extreme poverty once-and-for-all by 2022 can be expected to create more opportunities for companies to harness CSR initiatives as a vehicle for helping officials reach their work targets. The goodwill generated from such activities can in turn position their businesses closer to key government stakeholders in their regions and industries of interest. With regard to ecological rehabilitation, the Xi administration will likely continue to tighten down on its stricter enforcement of environmental regulations next year as well as take steps to attract more investment into green programs.

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